Spatial competition and merging incentives when firms produce complements

In a model of spatial competition, we show that complementarities can benefit the parties to a merger more than any outsiders thus leading to higher concentration. The driving force is the negative demand externality imposed by the merging firms on the non-merging units in the same locations, which tends to counteract the increase in the composite price (or overall cost of shopping) in the locations with a merger. Since however some of the outsiders are harmed, we also consider how the possibility of a subsequent merger by the initially harmed outsiders may change the incentives for the first integration. Our results show that if the number of firms is sufficiently large, then the initial merger will still be carried through. It follows then that there would be a real need for regulation: market power and market interactions may provide firms with incentives to merge, just like efficiency gains do.